It has no role in a market economy

TNN|

Jun 23, 2007, 12.43 AM IST

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Scrap purchase preference

The recent Supreme Court ruling in the Caterpillar India vs Western Coal Fields case calling for prompt review of the government's purchase preference for public sector enterprises (PSEs) has come not a day too soon.

Such preferences are an anachronism from the pre-reform era, and need to be discontinued without further delay. The fact is that the preference policy has been extended ad nauseam and is wholly incongruous in a liberalising, fast-growing economy.

After all, an explicit, blanket preference formula would necessarily be at huge national cost. It implies a perverse incentive to pad costs. As the apex court has gone on record, "by imposing a condition like purchase preference... a monopoly is being created."

The court has noted that there "may be no competition left if a 10% margin is given." It has hence directed that industry-wise assessment be done by the concerned ministries on whether any preference is called for and to determine the margin of preference so required. It has been rightly held that "if there is already cost effectiveness in any PSEs there may not be any need for the preference being given".

The whole point about reforms and opening up is that the consumer and the exchequer get better value and economise on routine purchases. And that producers and suppliers competitively seek custom. Surely, a well functioning market for government purchases is for the greater good.

Yet the fact of the matter is that the purchase preference policy has only been made more rigid. In recent purchase orders issued by the Coal India, for instance, the language used is "will," but earlier the word used to be "may," which is clearly a policy change for the worse.

It implies mandatory purchase preference as a general rule, which would almost certainly have jacked up costs right across the board. Note that despite sweeteners like purchase preferences, in fiscal 2005-06 alone the losses of central PSEs were as high as Rs 5,951 crore, while those for loss-making sick CPSEs were an additional Rs 5,057 crore! The express need, clearly, is to abolish purchase preference, for PSEs to be price competitive.